Thoughts on Evidence on the National Minimum Wage.

In general, the classical economic view is that by pricing people whose labour is worth £5.92 or less per hour out of the market, a National Minimum wage increases unemployment. And the economic evidence from other countries is pretty compelling: a minimum wage does indeed increase unemployment. Increasing the cost of labour, you decrease the demand for it. This falls hardest on those whose productivity – the poorly educated, those without experience – is most marginal. Such people will NEVER get any job because the jobs they can do have been outsourced to low-wage countries or otherwise destroyed. As a result, the poor will never get the training and experience (especially important is the experience and track-record of reliably turning up to work) necessary to move on up to better-paid work.

So, how does the evidence support these two views? Now because the introduction of the National minimum wage didn’t cause an immediate spike in unemployment, it can be argued that the minimum wage was introduced without significant effects on the labour market. One nil to Gordon Brown against the evil capitalists who want to bring back slave labour? Well no. 1999, when the Minimum wage was introduced to 2002 is not exactly the long run. It also coincided with a steady recovery running into a boom, and as I often argue, marginal government intervention is very, very difficult to tease out of the economic effects of the business cycle. In addition, it’s very difficult to tease out the effects of the minimum wage within a country because so many other factors – international effects, the price of oil, the rise of China as an economic power etc… will all have effects which distort the data. Better use two similar countries or states and see if there’s any effect where you can isolate minimum wage legislation over a long time period between two or more otherwise similar jurisdictions. Effects on employment effects can also be more easily deduced when looking at individual industries care homes for example, which may have been masked in the economy as a whole.

Secondly there is the effect of the business cycle on employment: Companies whose business involves low wages to marginally productive workers will see margins fall as a result of minimum wages. They will be able to ride this out when times are good, but go bust when times get harder. Such businesses will not be started subsequently, and so you’d expect low-skill & youth unemployment to rise faster in a recession and not fall in the subsequent recovery.

Thirdly a national minimum wage becomes the de-facto low-skill wage, causing the wages of some people just above the minimum wage to fall creating a cartel effect on employers who utilise low-skilled labour. The government says it’s OK to pay £5.93. We will pay £5.93 where we used to pay £7 because everyone else is. This is called ‘Wage Compression’. The incomes of some rise, the incomes of those just above the minimum wage either fall, or rise less quickly than they otherwise would have done. Though this paper concludes that the lowering of inequality between workers is a positive effect, I doubt those facing a life-time with no prospect of much in the way of pay rises agree. I’d rather start a career earning a pittance with the prospect of hard work being rewarded by pay rises, than being at the tender mercy of the Government’s minimum wage legislation for the rest of my adult life.

So did the minimum wage increase unemployment? No, in the short term, probably in the longer term. Has it had other effects on the Labour market? Of course. My argument is not that low wages are good, but that they’re better than unemployment. In the UK’s case, my view is that the minimum wage was set low, and this means its effects are minimal. However the temptation is to appear munificent and raise the minimum wage to levels which WILL have an impact on unemployment. Or you can do what Gordon Brown did: Freeze tax levels & raise minimum wage, whilst abolishing a low introductory tax band with the result that minimum wage workers received almost nothing from their “pay increase”.

The other side of the low-wage coin is the benefits system which means that workers on the minimum wage, full time face 90% marginal tax/benefit withdrawal rates. The disgusting perverse incentives in the UK welfare state are far more important than minimum wage effects. I’d abolish the minimum wage, and introduce a citizen’s basic income. This would ensure the state’s obligations to the poor were met, whilst allowing people to sell their Labour for whatever they could, without perverse incentives and intrusive monitoring.

My view on the minimum wage is therefore: Meh. It’s low enough at present not to really matter, but presents a huge temptation to idiot politicians, especially on the left. Anyone on the left who thinks it prevents abuse in any significant way without any negative effect on unemployment are wrong and guilty of typically left-wing wishful thinking. Anyone on the right who thinks it’s the main cause of unemployment is also wrong, and guilty of a small truth, big error. Anyone who thinks it a moral, A Priori issue, is an idiot. Anyone thinking this is possible to discuss reasonably on Twitter, is not only an idiot, but a total twat too. And if you’re looking for views on Philip Davies’ comments, Tim Worstall sums it up nicely.

8 replies
  1. Julian
    Julian says:

    "I'd abolish the minimum wage, and introduce a citizen's basic income"

    If you do that, what's to stop employers paying very low wages knowing that the state will make up the difference?

  2. Malcolm Bracken
    Malcolm Bracken says:

    "knowing that the state will make up the difference" you misunderstand a CBI. Everyone gets it.

    "what's to stop employers paying very low wages…" The market. If an employee could get more elsewhere they'd move. Why were only 6% paid below the NMW before 1999?

    The idea that there's a race to the bottom in wages, isn't backed up the evidence. The state cannot dictate firms pay uneconomic wages. They either pay economic wages or don't don't employ at all.

    So what would you suggest? Low wages or never get a job at all…

  3. JimmyGiro
    JimmyGiro says:

    "I'd abolish the minimum wage, and introduce a citizen's basic income. This would ensure the state's obligations to the poor were met, whilst allowing people to sell their Labour for whatever they could, without perverse incentives and intrusive monitoring."

    Agreed, and I would add Niall Ferguson's suggestion of replacing income tax with VAT. As long as all 'state' jobs were privatized that is.

    Those who save, help the investment for others. Those that squander, pay their dues through VAT.

  4. Anonymous
    Anonymous says:

    Those that squander, pay their dues through VAT.

    So why does nearly everyone at my local petrol station ask for a VAT receipt? Legit or a tax avoidance scam open only to the rich?

  5. Single acts of tyranny
    Single acts of tyranny says:

    You highlight the problem very well. If minimum wage legislation makes no difference, make it £100 a hour and hey-ho we are all fine (setting aside the inflationary effect). But if it does destroy jobs above a certain level then to avoid that you must set it at a level where no jobs are destroyed rendering the level impotent and irrelevant.

  6. Woolfiesmiff
    Woolfiesmiff says:

    Dear Anonymous

    "So why does nearly everyone at my local petrol station ask for a VAT receipt? Legit or a tax avoidance scam open only to the rich?"

    So you are saying that only very rich people use your petrol station?
    You buffoon. VAT receipts on petrol are for business mileage incurred in the course of work.

    Its not a scam there is an HMRC schedule for it.

    Christ on a bike socialists are so stupid

  7. Anonymous
    Anonymous says:

    I'm a bit hammered, I'm listening to Jefferson airplane (best of), so admittedly probably not really working at 100%, but what do you mean by

    and introduce a citizen's basic income


    Do you mean anyone who works gets x amount minimum? I assume thats a per hour? in which case surely that's the same thing?

    Anyway, back to the wine and the white rabbit.

    Otherwise, awesome blog, many thanks to you and travelgal.



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